The Fed's only possible reason to raise rates is vanishing

Market expectations for a June interest rate increase from the Federal Reserve have fallen to just 47%, down from 66.5% only a week ago, according to Bloomberg’s World Interest Rate Probability data.

What happened? The main justification for the central bank’s stated desire to push interest rates higher, the possibility that inflation was finally moving higher, suddenly disappeared as consumer prices fell in March for the first time in over a year. Core prices, which exclude food and energy costs and are closely watched by Fed officials, also slipped 0.1%, making for their first decline since January 2010.

Put another way: The US central bank seems stuck in an annual ritual of starting the year off with overly optimistic expectations only to temper them as reality catches up with forecasts. At this point it’s more groundhog day than mere déjà vu.

In 2016, the Fed started the year talking about four rate hikes. It raised rates once, in December. This year, it has been mulling a similar number. It hiked the fed funds rate in March and nodded to a few more this year. But now that prospect is looking dimmer.

“If the data stay like this I don’t think they hike at the June meeting,” Ethan Harris, economist at Bank of America-Merrill Lynch said on Bloomberg Television. “Bonds are reasonably price but there are some risks to the equity market.”